We have reiterated our Neutral recommendation on Fifth ThirdBancorp (FITB) following a detailed analysis of the company’s fundamentals, strengths and weaknesses in the context of the current economic environment.

Fifth Third’s first quarter 2011 earnings of 10 cents per share were significantly below the Zacks Consensus Estimate of 27 cents per share. The results were affected by lower net interest income and non-interest income, partially compensated by better-than-expected improvement in credit metrics and lower operating expenses.

Net income decreased by $153 million or 17 cents per share of discount accretion recorded in preferred dividends, which increased due to the repurchase of $3.4 billion under the Treasury’s Troubled Asset Relief Program in February.

Going forward, we believe that Fifth Third is well positioned to benefit from a rebound in economic conditions along its footprint. Its diverse revenue mix also augurs well. Net interest income is also expected to benefit from the maturing CDs in the second half of the year.

The company’s efforts to restructure its balance sheet and alleviate its credit challenges are encouraging. Moreover, Fifth Third stands to benefit from an improved funding mix.

Solid capital position and the dividend increase following the Fed’s approval have boosted investors’ confidence. Fifth Third was one of the 19 banks including Wall Street biggies such as JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC) and U.S. Bancorp (USB) that were subjected to stress tests conducted by the Fed. The financial positions of these banks were assessed by Fed prior to giving them the nod for dividend increase and share buybacks.

Following a review of its current capital position, we believe that further capital deployment through increase in shareholders’ dividend, share repurchases and acquisitions might also occur going forward.

However, revenue headwinds and concerns over regulatory issues remain. Although the repayment of the bailout money has removed the government overhang, the dilutive impact from the stock offering for that repayment cannot be ignored. We would like to see substantial top-line improvement before becoming extremely positive on the stock.

Yet, given the current economic environment along its footprint, any robust expansion remains elusive in the near term. Additionally, the ongoing investigation by the Securities and Exchange Commission for accounting and reporting matters related to its commercial loans is also a near-term concern.

As of now, the risk-reward profile of Fifth Third seems balanced and therefore our Neutral stance is reiterated on the stock. Additionally, Fifth Third currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.